COMMISSION STAFF WORKING DOCUMENT Country Report Lithuania 2015 {COM(2015) 85 final} This document is a European Commission staff working document . It does not constitute the official position of the Commission, nor does it prejudge any such position.
Date: 2015-02-26
Institutions: European Commission
Subjects: Lithuania, economic consequence, economic recession, economic recovery, employment statistics, energy supply, marginalisation, poverty, security of supply, structural adjustment, tax collection, youth unemployment













EUR-Lex - 52015SC0034 - EN











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52015SC0034

COMMISSION STAFF WORKING DOCUMENT Country Report Lithuania 2015  {COM(2015) 85 final}     This document is a European Commission staff working document . It does not constitute the official position of the Commission, nor does it prejudge any such position. /* SWD/2015/0034 final */









 
Executive summary  1
1.       Scene
setter: economic situation and outlook  3
2.       Structural
issues 10
2.1.   Taxation,
fiscal framework and long-term fiscal sustainability  11
2.2.   Pensions and
active ageing  13
2.3.   Banking,
financial stability and access to finance  15
2.4.   Social and
labour market policies 17
2.5.   Education and
skills 23
2.6.   Business
environment, innovation and state-owned enterprises 25
2.7.   Infrastructure
and the environment 29
AA.   Overview
Table  32
AB.   Standard
Tables 37
LIST OF Tables
1.1.     Key
economic, financial and social indicators - Lithuania   7
1.2.     Macroeconomic
Imbalance Procedure (MIP) scoreboard indicators - Lithuania   8
AB.1.  Macroeconomic
indicators 35
AB.2.  Financial
market indicators 36
AB.3.  Labour market
and social indicators 37
AB.4.  Taxation
indicators 38
AB.5.  Expenditure on
social protection benefits (% of GDP) 39
AB.6.  Green growth  40
AB.7.  Product market
performance and policy indicators 41
LIST OF Graphs
1.1.     External
and domestic demand, contributions to growth  3
1.2.     Labour
market 3
1.3.     Working age
population aged between 15 and 64 (2013=100) 4
1.4.     Labour
productivity (per person employed, 2005=100) 4
1.5.     Break-down
of potential growth  4
1.6.     Breakdown
of debt by sector, ESA 2010 (non-consolidated) 5
1.7.     Non-performing
loan ratio, and domestic credit growth  5
1.8.     Energy
import dependency  6
2.1.1.  Tax burden as
% of GDP (contribution) 11
2.2.1.  Old-age
dependency ratio  13
2.4.1.  Change in
total and working-age population (Index 100 = 2013) 17
2.4.2.  Unemployment
by skill level (%) 18
2.4.3.  At risk of
poverty and social exclusion (AROPE) 19
2.6.1.  Business
expenditure on R&D (BERD) as % of GDP  24
LIST OF Boxes
1.1.     Economic surveillance process 6
LIST OF Maps
No table of contents
entries found.
Despite increased external risks,
Lithuania is expected to continue to achieve solid growth in the short term. Lithuania showed remarkable adjustment capacity in the wake of the
financial crisis. Its regained competitiveness has supported solid growth in
recent years, which averaged around 3.3% per year from 2012 to 2014. This was
initially led by exports, but domestic demand has now taken over as the main
growth engine. It is expected that domestic demand growth will carry its
momentum into 2015, largely driven by rising wages, falling unemployment and
subdued inflation. For 2015, Lithuania’s real GDP is expected to grow by 3.0%,
according to the European Commission 2015 winter forecast. Unemployment is set
to further continue its downward trend to 8.7% in 2015. However, despite the
solid gains in employment, structural challenges persist, particularly
demographic ones. As regard the external environment, growth in the EU is
expected to remain weak and downside risks persist as geopolitical tensions
between Russia and the EU mount. 
This Country Report assesses Lithuania’s
economy against the background of the Commission’s Annual Growth Survey which recommends
three main pillars for the EU’s economic and social policy in 2015: investment,
structural reforms, and fiscal responsibility. In line with the Investment Plan
for Europe, it also explores ways to maximise the impact of public resources
and unlock private investment. The main observations
and findings of the analysis are:
·       The tax system has not exploited the scope available for the use of
growth friendly taxes. Tax revenue is to a large
extent dependent on indirect and labour taxation, while the percentage of
revenue contributed by environmental or wealth taxation remains very low. There
are some risks to the sustainability of the current pension system as it does
not adequately take into account the effects of a shrinking and ageing
population.
·       The working age population is shrinking rapidly, possibly slowing
down potential growth. Population decline is due to
negative demographic developments but aggravated by net emigration and poor
health outcomes as illustrated by low life expectancy and high morbidity rates.
Coverage of active labour market policies remains low and focuses still too
much on less effective measures. Young people still face some difficulties to
integrate into the labour market.
·       The Lithuanian labour market has to a large extent proven its
flexibility. Nevertheless, the legislation on
employment protection is outdated. High redundancy payments and long
notification periods have led to weak enforcement and overall governance of
labour relations. Social dialogue mechanisms are weak. 
·       The population at risk of poverty and social exclusion in Lithuania
remains high. With more than 30% of its population
being at risk, Lithuania ranks among the worst performers in the EU in this
respect. Although the situation has improved somewhat in recent years, the poor
overall situation raises concerns about the adequacy of the Lithuania’s social measures.
·       Lithuania has enjoyed easy gains from catching-up thanks to
relatively cheap, but qualified labour and the adaptation of existing
technology. However, these are set to come to an end. Skills shortages have emerged and are expected to become more
acute in the future. In addition, the education and training on offer is not
always relevant to the labour market which may negatively affect the quality of
the labour force. 
·       Private sector investment, in particular into research and
innovation is low, which may have negative repercussions for long-term growth. Lack of alternative financing sources hinders investment into
riskier projects, as banks tend to be risk averse.
·       Lithuania will need to continue to work on ensuring security of
energy supply and competition on its energy market. Several projects have been
launched, and some have already been implemented, but more progress is needed.
Energy-intensity in Lithuania is high making it one of the least
energy-efficient countries in the EU. Lithuania’s high energy intensity continues to fuel
energy imports, partially offsetting recent efforts to boost energy security.
In addition, Lithuania is likely to miss its Europe 2020 greenhouse gas
emission targets.
Overall, Lithuania has made some
progress in addressing the country-specific recommendations. As regards the recommended strengthening of the budgetary strategy
and review of the tax system, some minor revenue-increasing measures have been
adopted. Lithuania has transposed the Fiscal Compact into national law, but its
fiscal framework still has room for improvement: in particular, binding
expenditure ceilings are yet to be implemented. Relatively minor measures have
been adopted for the recommended comprehensive pension reform, but these fall
short of addressing the medium-term challenge of pension system sustainability.
On social protection and labour market policy, the government is considering a
number of relevant policies but these have not yet been adopted. Initial steps
have been taken to accelerate housing renovation in order to increase energy
efficiency. Lithuania has made some progress on upgrading its energy
infrastructure. It has opened the first liquefied natural gas terminal in the
Baltic States, and its continuing efforts to improve its gas and electricity
interconnections with its neighbouring states will further strengthen energy
supply security. Finally, Lithuania has made substantial progress on reforming
state-owned enterprises and has enacted respective legislation to ensure that
the effects of the reform are lasting. Therefore, the reform of state-owned
enterprises may be considered almost complete.
Growth,
labour market, and inflation
After a major recession (with one of the
sharpest declines in real GDP across the EU in 2009), the Lithuanian economy
has returned to strong and steady growth path, with real GDP growing around 3%
in recent years. Following an export-driven
recovery, strong domestic demand took over as the main growth driver in the
course of 2013 (Graph 1.1). Lithuania's real GDP growth rate is
estimated to have reached 3.0% in 2014 and is expected to grow at a similar
rate over the next years. Despite continued geopolitical uncertainty and the
expected recession in Russia, private demand is forecast to remain strong as
wage growth, and subdued inflation should strengthen household disposable
income. 
 Graph 1.1:     External and domestic demand, contributions to growth 
 Source: European Commission 
Private investment grew strongly in the
first half of 2014, but seems to have slowed down in the second half of the
year due to lower economic sentiment. It is
expected to pick up in the course of 2015-16 as companies' capacity utilisation
is at a historically high level. In addition, EU co-financed projects are
expected to support public and private investment in the future.
Lithuania’s labour market is recovering
(Graph 1.2). The
unemployment rate declined by around two percentage points every year in
2010-2014. This trend is expected to continue in 2015. However, the country
faces broader human capital development and skills supply challenges, as
illustrated by Lithuania's relatively low performance on basic skills in the
PISA survey. In addition, the labour market relevance of education and the low
rate of adult learning remains a weakness.
 Graph 1.2:     Labour market 
 Source: European Commission 
Lithuania is the EU’s fastest ageing
country. Its working-age population is shrinking
significantly, both because of negative natural growth and high and persistent
emigration, especially of young people (Graph 1.3). If this steep fall in is not
compensated by return migration or new immigration, it will jeopardise the
availability of suitable labour resources and will challenge the sustainability
of long-term economic growth prospects and social security systems especially
the pension system. 
 Graph 1.3:     Working age population aged between 15 and 64 (2013=100) 
 Source: European Commission 
Inflation as measured by the harmonised
index of consumer prices (HICP) declined in the course of 2014. The HICP index reached 0.2% in 2014 mainly due to low energy and
food prices. Inflationary pressures are set to remain subdued in 2015.
Continuing low oil prices are expected to dampen potential one-off effects
resulting from Lithuania’s accession to the euro area on 1 January 2015. Low
oil prices are also expected to dampen higher prices in the service sector.
Labour
productivity, wages and costs
Favoured by falling unit labour costs
(Graph 1.4), Lithuania has managed to achieve a
remarkable recovery. Looking ahead, however, a
tighter labour market and slowing productivity growth are set to increase unit
labour costs and thus weaken Lithuania’s competitiveness. 
 Graph 1.4:     Labour productivity (per person employed, 2005=100) 
 Source: European Commission 
Total factor productivity growth and
increasing capital growth rates fuelled Lithuania’s
catch up process, before the start of the crisis in 2009 (Graph 1.5). Since
then, growth rates have declined, and the shrinking working age population will
put further downward pressure on potential growth. Against this backdrop,
Lithuania faces the challenge of managing the transition from a low-cost,
low-tech economy to a more skills- and innovation-intensive economy.
 Graph 1.5:     Break-down of potential growth 
 Source: European Commission 
Fiscal
developments, financial sector and credit supply
Tight fiscal room leaves Lithuania
particularly vulnerable in case of adverse developments in the international
economic environment. Increasing resilience to
external shocks and preventing the emergence of excessive imbalances remain
important policy objectives. In addition, healthy public finances are required
to allow automatic stabilisers to play their full role in mitigating possible
economic shocks. The general budget deficit has declined steadily in the
post-crisis period and is expected to be 1.2% of GDP in 2014, before reaching
0.9% in 2016. The structural deficit is expected to fall to 1.9% in 2014, and
is expected to decline further to 1.7% in 2015 and to 1.2% of GDP in 2016.
These developments should keep public debt at around 40% of GDP (Graph 1.6) over the coming years. However, the
current level is more than twice as high as before the financial crisis, which
shows that there is scope for further prudent fiscal policy generating
additional fiscal space.
 Graph 1.6:     Breakdown of debt by sector, ESA 2010 (non-consolidated) 
 Note (1): * indicates estimated figure using quarterly data. Source: European Commission 
The tax structure relies heavily on
indirect and labour taxes. In contrast, environmental and wealth taxes remain
comparably low. Since fiscal consolidation measures
based on expenditure cuts seem to be largely exhausted, further increasing the
revenue side will become more important going forward. Broadening and
restructuring the tax system by shifting the tax burden away from labour, and
in particular low-income earners, towards taxes that are less detrimental to
growth, such as environmental or property taxes, could be an important factor
in boosting future growth and employment. 
The banking industry entered the banking
union in a stable and well-capitalised state. The
Lithuanian financial sector continues to be stable, and shows improving banking
soundness indicators. The average capital adequacy ratio for the banking sector
increased over the course of 2014, while the average ratio of non-performing
loans (NPLs) fell further (Graph 1.7). 
Credit growth remained sluggish in 2014,
and is set to remain subdued in 2015 (Graph 1.7). The
main barriers to further credit growth include an ongoing deleveraging process
of the private sector (Graph 1.6) and tightened financing requirements.
This is to be of particular importance for SMEs, since financial institutions
seem to be focusing on larger and lower-risk corporations.
 Graph 1.7:     Non-performing loan ratio, and domestic credit growth 
   
 Source: ECB 
Investment,
innovation, business environment and energy
Investments below the European average
raise concerns on the sustainability of achieved productivity gains. Investment spending in Lithuania increased considerably until 2007,
partially fuelled by a property boom. However, since then investment has fallen
steadily and is now below the EU average in percentage of GDP terms. Reviving
investments remains crucial for maintaining competitiveness gains and further
catching up.
Lithuania has scope to improve its
innovation performance. Despite an increase in
R&D intensity since 2010, Lithuania currently spends about 0.95% of its GDP
on R&D, putting it well below its Europe 2020 target of 1.9%. Half of the
R&D target is planned to come from business investments, but that is continuing
to decline. As a result, Lithuania is set to remain a poor R&D performer.
This trend complicates Lithuania's efforts in moving up the value chain, and
may affect the country's long-term growth prospects.
Lithuania’s economy relies heavily on
energy imports and its energy efficiency is low.
Since the closure of its nuclear power plant in 2009, the country has imported
almost all of its energy needs from non-EU countries. It is therefore exposed
to considerable energy supply risks (Graph 1.8). Moreover, Lithuania’s economy
continues to suffer from high levels of energy intensity, with housing and
industry showing values well above the EU average. 
 Box 1.1: Economic surveillance process The Commission’s Annual Growth Survey, adopted in November 2014, started the 2015 European Semester, proposing that the EU pursue an integrated approach to economic policy built around three main pillars: boosting investment, accelerating structural reforms and pursuing responsible growth-friendly fiscal consolidation. The Annual Growth Survey also presented the process of streamlining the European Semester to increase the effectiveness of economic policy coordination at the EU level through greater accountability and by encouraging greater ownership by all actors. This Country Report includes an assessment of progress towards the implementation of the 2014 Country-Specific Recommendations adopted by the Council in July 2014. The Country-Specific Recommendations for Lithuania concerned its budgetary strategy and tax system, a comprehensive pension system reform, social protection and labour market policies, poverty, a reform of state-owned enterprises, and energy. 
 Graph 1.8:     Energy import dependency 
 Source: European Commission 
Poverty
and social exclusion
Poverty and the provision of a
subsistence income to those most in need remain areas of concern. Despite the fall in the share of people at risk of poverty or
social exclusion since the crisis, the overall level of 30.8% of Lithuania’s
population remains high. The most vulnerable social groups are children, old
age pensioners and the disabled. Income inequality is ranked among the highest
in the EU. 
 Table 1.1:       Key economic, financial and social indicators - Lithuania 
 Source: European Commission, ECB 
 Table 1.2:       Macroeconomic Imbalance Procedure (MIP) scoreboard indicators - Lithuania 
 (1) Figures highlighted are the ones falling outside the threshold established by EC Alert Mechanism Report. For real effective exchange rate (REER) and unit labour costs (ULC), the second threshold concerns non-Euro Area Member States. (2) Figures in italic are according to the old standards (ESA95/BPM5). (3) Export market shares data: the total world export is based on the 5th edition of the Balance of Payments Manual (BPM5). Source: European Commission 
Preventing the emergence of excessive
fiscal imbalances, ensuring sustainable and healthy public finances, and
finding the right balance between fiscal revenue and expenditure measures
remain important policy objectives. This is because they reduce the vulnerability
of an economy to adverse shocks, which can impede growth.
Taxation
Increasing tax revenues contribute to
strengthening fiscal buffers, which remain important safeguards given
Lithuania’s vulnerability to adverse international economic shocks. Lithuania’s tax-to-GDP ratio remains one of the lowest in the EU.
Lithuania relies to an equal extent on indirect taxes (11.4% of GDP) and social
security contributions (11.0% of GDP), while direct taxes accounted for just
4.9% of GDP, the lowest proportion in any EU country (Graph 2.1.1). Recurrent property taxation and
environmental taxes contribute little to overall tax revenue. Revenues from environmental taxation, as a percentage of GDP, stood
at 1.7%, below the EU average of 2.4% in 2012 ([1]). In particular, Lithuania along with Estonia are the only two
Member States without any form of private passenger car taxation or road-use
tax for private passenger vehicles. Moreover, excise duties on motor fuel,
petrol and diesel are among the lowest in EU. Lithuania applies low excise
rates for diesel used as propellant and zero rates to liquefied petroleum gas
and natural gas used as heating fuel. The overall implicit tax rate on energy
is the 4th lowest of the EU-28.
Rebalancing taxation to alleviate the
tax burden on low income earners may have beneficial effects for domestic
consumption and economic growth. The tax wedge for
single low-wage earners in Lithuania is relatively high ([2]), which may be a disincentive for the low-skilled to search for
employment, and could even encourage more undeclared work.
 Graph 2.1.1:   Tax burden as % of GDP (contribution) 
 Source: European Commission 
Lithuania continues to face challenges in
terms of tax compliance, in particular regarding indirect taxation. An EU-wide study indicates that there is a high level of
non-compliance and non-collection of value added tax (VAT) in Lithuania ([3]). In 2012, the VAT gap (i.e. the difference between the legal VAT
revenue projections and the actual revenues) stood at 36% which was more than
twice the EU average of 16% and it is the third largest in the EU. Reviewing
the tax system, and increasing those taxes that are least detrimental to
growth, and improving tax compliance were identified as challenges in the 2014
European Semester.
Only minor changes to the tax system
were introduced in 2014, and the overall progress in moving to a growth
friendly tax system was limited. The immovable
residential property tax has changed from 2015, with a broadening of the tax
base, and a reduction in the tax rate from 1 to 0.5%. Looking at green taxes,
Lithuania has adopted a landfill tax on waste to be introduced in 2016. Even
though, Lithuania is not on track to achieve its greenhouse gas emissions
target by 2020, it has not considered introducing vehicle taxation nor
reviewing its energy taxation (in particular rates of transport fuels), which
could be reconsidered in view of the overall fall of fuel prices.
There is still scope to improve VAT
collection, focusing on trading activities prone to tax avoidance and fraud ([4]). Tax compliance was mentioned in a
2014 Council recommendation and Lithuania has started to implement a strategy
for improved tax collection for 2014-17, which includes, for example, taking
into account the taxpayers' risk profiles. It is, however, still too early to
assess its impact.
Fiscal framework
So far Lithuania’s medium-term budgetary
framework is non-binding. In particular multiannual
revenue and expenditure targets have often changed as the budgetary framework
made no clear connection between medium term targets and annual budgets.
Further strengthening adherence to multiannual targets and refining
well-defined and transparent revenue and expenditure rules are crucial in
effectively steering government size, preventing procyclical spending, and
constraining the use of windfall revenues. Strengthening the fiscal framework
was also recommended by the Council in 2014. Amendments to laws governing the
national budget, which aim to transpose inter alia Council Directive 2011/85/EU
on the requirements for budgetary frameworks, and to achieve a balanced or
surplus position over the cycle, were in full force for the first time for the
2014 budget planning and execution process. These amendments extend the
government’s accountability for the implementation of multiannual fiscal
targets.
Lithuania advanced in complementing its
fiscal framework in 2014, but doubts remain. In
November 2014, the country transposed the rules of the Fiscal Compact into a
constitutional law and two additional laws amending existing legislation This
package, which entered into force from 2015, places the structural
budget-balance rule at constitutional level, and is intended to strengthen the
binding character of the medium-term framework. However, the rule does not
appear to be clearly centred on compliance with the medium term objective and
its adjustment path. In this respect, it is not unequivocally anchored to the
EU fiscal framework. The credibility of the new fiscal framework is also
weakened by loosely defined escape clauses, in particular in the event of of a
negative output gap. The budgetary cycle in 2015 will be the first test of the
new fiscal framework and its effectiveness.
Lithuania has given its National Audit
Office the task of setting up an independent fiscal council. The fiscal council is set up as an entity within the National Audit
Office, and it is up to the Office to ensure the council’s independence and
autonomy. However, the de facto independence of the council’s work and
funding has still to be ensured. This is of particular relevance given that
there are no additional regulations formally ensuring the independence of the
fiscal council within the existing National Audit Office. 
Long-term fiscal sustainability 
The budgetary impact of population
ageing poses a challenge to long-term fiscal sustainability in Lithuania, in
particular in the area of pensions. The pension
system was also one of the challenges identified for Lithuania in the 2014
European Semester. The government intends to revise its 'social model', which
would also include a proposal on comprehensive pension system reforms. However,
Lithuania has not so far taken any decisive legislative measures. Lithuania's
government debt is expected to amount to 41.1% of GDP in 2014, and is expected
to rise to 41.8% in 2015, and then fall to 37.3% in 2016. After that, debt is
projected to stay nearly unchanged for the next ten years. However, full
implementation of measures announced in the 2014 convergence programme would
reduce it below 30% of GDP by 2025.
Pension systems that are fair for all
generations form an integral part of a financially sustainable economic and
social model. Adverse demographic developments and
persistently high emigration rates (in particular emigration by young people)
undermine the long-term fiscal sustainability of Lithuania’s pension system ([5]). Since 2001 Lithuania's population shrank from 3.5 million to 2.97
million and EUROSTAT expect it to fall further to below 2 million by 2040.
Spending on pensions is expected to rise over the next 50 years. Lithuania is
one of the fastest ageing EU countries and is expected to experience a doubling
its old-age dependency ratio by 2040 (Graph 2.2.1) ([6]).
 Graph 2.2.1:   Old-age dependency ratio 
 Source: European Commission 
Present pension benefit levels are very
close to the at-risk-of-poverty threshold ([7]), with no indexation. The low average
pension and the absence of indexation casts doubts on current pension adequacy
and is one major cause of the sharp increase in poverty among the population
older than 65 years. 
The employment rate of older workers (aged
55 to 64) exceeds the EU average (53.4% vs 50.2% in 2013, increasing since
2011) thanks to a high proportion of elderly women (51.2% in Lithuania vs 43.3%
in the EU as a whole). This may partially reflect the strong incentives to
continue to work, given the perceived inadequacy of pensions.
As regards the employability of older
workers; under the Law on Support for Employment,
which has been amended in September 2014, employers may receive larger
financial incentives for nominating experienced employees (aged above 50) to
act as tutors for newly employed staff (aged under 29). In 2015, Lithuania has
started work on a Programme for Active Ageing. This is expected to begin in
2016 and is intended to run for four years. The challenge will be to promote
adult learning and adapt the working environment to the needs and requirements
of older staff, at both national and company level.
The recently implemented reform of the
prefunded second pillar of the pension system will only contribute to the
sustainability and adequacy of the pension system when it begins to mature two
to three decades from now, and only for those who have used the tax subsidy
scheme to add voluntary contributions (primarily medium to high income earners).
In the meantime, the reform may result in additional risks to pension adequacy
and sustainability, in particular against the backdrop that public resources
are shifted from the first to the second pillar (e.g. in order to provide tax
subsidies for voluntary contributions) ([8]). 
Minor changes to the legislation, including
for pension calculations for foreigners, carers, people with disabilities and
orphans, plus the reversal of pension reductions implemented in 2010-11, cannot
be considered comprehensive pension reform. Moreover, insufficient action has
been taken as regards the diversification of risks in pension funds. Recently,
the government has announced that it intends to present a comprehensive pension
reform in the second quarter of 2015. This announced reform programme includes,
for instance, pension indexation rules, and a rise in the pensionable age after
2026. 
So far, Lithuania has not taken any
decisive action towards a comprehensive pension system reform, which can
improve its long-term sustainability and ensure the adequacy of the pensions in
payment. Overall, the challenges for Lithuania’s pension system remain.
Lithuania's banks entered the banking
union financially sound. However, credit growth remained sluggish as a result
of subdued demand and strict lending conditions.
High capital adequacy ratios for the three largest banks were confirmed by the
outcome of the ECB Comprehensive Assessment published in October 2014. Five
Scandinavian banks dominate the Lithuanian banking sector with a market share
of around 90% of total assets. Following the closure of two domestic banks
(Snoras, Ukio) and several credit unions in 2012/13, two domestic banks
(Siauliu, Medicinos) and the remaining credit unions control the rest of the
market. Private sector deposits continued to rise in 2014, but overall credit
remained flat despite an increase in mortgage lending and consumer credit. The
most common barriers to obtaining credit are reportedly tight financing
requirements, lack of collateral and the high cost of obtaining finance
(interest rates, guarantee fees, administrative costs, etc.) ([9]).
Lithuanian banks have been relatively
successful in resolving their non-performing-loans. They have been supported in
this by their parent banks and by the regulatory facilitation fostered by the
Bank of Lithuania. Bank profitability, was restored
relatively quickly after the financial crisis, but has remained below the
pre-crisis levels. Return on equity rose to 8.9% by early 2014, mainly because
of improved efficiency and non-interest income. The return on assets was at 1%,
as compared with the EU average of 0.1%.
The new funding model based on local
savings prevailed. Following the crisis, the sharp
reduction in external financing, mainly in form of loans from the parent banks,
was offset by high growth in domestic deposits, which now account for about 70%
of banks’ total liabilities of banks ([10]). The proportion of foreign retail deposits is low (about 2% of
total liabilities). They are diversified geographically and do not pose
significant risk.
Lithuania has facilitated access to
credit by extending the range of movable assets that can be used as collateral. In addition, many companies still have sufficient reserves to
finance investment without needing to obtain credit. The main banks, however,
continue to focus their business on large companies and major economic centres
with lower risk profiles. This is to the detriment of smaller companies which
may experience difficulties getting credit. 
In Lithuania, social protection and
labour market challenges are closely intertwined.
Despite the continuous improvement of the economic situation, inequality and
poverty reduction remain major challenges for Lithuania.
The steady decline in the working-age
population poses a strong risk to social security sustainability in particular
the pension system, but also poses a risk of slower potential growth if labour
market participation does not increase further (Graph 2.4.1). Lithuania is projected to
lose a third of its population by 2040 due to negative natural growth and
persistent emigration, especially of young people.
 Graph 2.4.1:   Change in total and working-age population (Index 100 = 2013) 
 Source: European Commission 
This is further aggravated by poor
health outcomes, in particular high mortality rates mainly driven by avoidable
deaths from treatable and preventable diseases. The
age-specific death rate at working age (i.e. 20 to 65 years) is the highest in
the EU, giving rise to an estimated additional 4.5% reduction in Lithuania’s
workforce, as compared with the EU average. Despite recent reforms and a number
of interrelated strategic documents, the challenge remains to design a more
efficient health care system which shifts more resources from costly inpatient
treatments to primary care, day treatment and nursing care. Early prevention
remains a crucial issue in this context ([11]).
Labour market participation 
The sharp decline of the working age
population accentuates the need to promote employment of those facing difficulties
to enter or re-enter the labour market. Three major
issues emerge as regards labour market and regulation: 1) young people facing
difficulties to integrate into the labour market 2) weak active labour market
policies, and 3) outdated employment protection legislation with weak overall
enforcement. 
Youth unemployment 
Securing a smooth school-to-work
transition for youth and outreach to young people who are 'Neither in
Employment, Education or Training' (NEETs) thus remains a priority. Youth unemployment amounts to 16.4% in the third quarter of 2014,
while the NEET rate is stable at around 11% since 2011. Most young unemployed,
registered in the Public Employment Services, have no vocational qualifications
or work experience ([12]). Roughly
one third of NEETs is not registered as unemployed. Thus, to succeed in the
outreach to unregistered NEETs will be one of the main challenges of the Youth
Guarantee delivery. 
The Youth Guarantee scheme has started
to address unemployment. Although it is too early
to assess its effectiveness, the Youth Guarantee is progressing ([13]). It uses a broad network of partnerships with key stakeholders,
but that is not yet fully operational ([14]). 
The outreach to young NEETs not
registered with the public employment service remains a challenge. Supporting measures (such as voluntary work opportunities or
generic competences training), which focus particularly on young people from
disadvantaged backgrounds and ensure a clear focus on skills in demand are
currently lacking. Lithuania has adopted an amendment to the Law on the Support
for Employment which introduces measures for young people to acquire skills in
the workplace in the form of a ‘voluntary practice’ scheme. The scheme has a
maximum duration of four months, and is based on bilateral agreements with
employers. It is too early to assess the take-up of this measure and whether
the quality of training outcomes is ensured.
Active labour market policies
In view of the need to foster employment
of those facing difficulties to enter the labour market, active labour market
policies (ALMP) remain weak. Expenditure on ALMP is
among the lowest in the EU. Its coverage is low ([15]), and the low effectiveness of certain ALMP measures indicates a
need for better designing ALMPs. 
Despite their effectiveness, the coverage
of vocational training and support for the acquisition of professional skills
of unemployed fell. At the same time, expenditure and coverage of subsidized
employment, however, rose significantly. The share of public work schemes is
slowly falling, but they remain a widely used ALMP measure. The outcomes of
these measures however remain modest, in particular as regards sustainable
labour market integration.
In addition Lithuania still features one of
the highest unemployment rates for the low-skilled in the EU.
 Graph 2.4.2:   Unemployment by skill level (%) 
 Source: European Commission 
National data indicate that measures often
focus on those unemployed who are easier to integrate back into employment,
leaving low skilled unemployed behind. This poses a risk of cementing their
unemployment spell. In addition, the ’incentives’ ([16]) proposed to employers for providing vocational training to
low-skilled or long-term unemployed are mostly of a short-term nature, This may
limit unemployed people's chances for a longer-lasting inclusion into the
labour market.
Employment protection legislation 
Improving labour relations and
employment protection legislation remain key challenges. Employment protection legislation (EPL) conditions in Lithuania are
considered strict due to relatively high redundancy payments (up to six average
monthly wages), a long notification period, and restrictions to dismissal of
employees. However, these regulations are not always enforced in practice ([17]). Lithuania is among countries where the perception of a high share
of undeclared work, notably envelope wages persists.([18]) Moreover, Lithuania’s labour relations are characterised by weak
social dialogue mechanisms. The lack of sector level bargaining agreements
seems to hinder the application of work practices that facilitate a good
balance between flexibility and security aspects.([19]) 
Some labour market reforms in the field
of labour regulations have been implemented, while others are ongoing. Amendments to the Labour Code, the Law on the Legal Status of
Aliens ([20]), and the
Law on Support for Employment ([21]) were adopted in order to reduce the administrative burden for
businesses. Research is being carried out on how to design a 'new Lithuanian
social model'. Experts are expected to propose a comprehensive package for the
regulation of labour relations and job creation, the development of a more
sustainable and transparent state social insurance system and reducing poverty
and social exclusion. The package still needs to be discussed with the social
partners and presented to the Lithuania's Parliament in the coming months.
Therefore it is too early for the Commission to assess this proposal. Given the
importance of the reform, the challenge will be to secure the adoption of the
full package, which includes flexibility and security parts, its financing and
to involve all social partners in its design.
Poverty
reduction and activation
Despite the continuous improvement of
the economic situation, inequality and poverty reduction remain major
challenges. The median income has increased and is
now close to the maximum reached before the crisis, but it is still the third
lowest in the EU in 2013. However, income inequalities are among the highest in
the EU ([22]), and can
have negative impact on the human capital development and economic growth ([23]). In spite of a fall since the crisis, the share of the population
at-risk-of-poverty or social exclusion remained above 30% in 2013 (the 6th
highest in the EU, while the average is 24.5%). The high share of severely
materially deprived people (16% in 2013, EY average 9.6%) is of particular
concern, as well as the deterioration of the at-risk-of-poverty rate ([24]). Moreover, there is a high risk of poverty and social exclusion
for persons with disabilities (42.2%) ([25]).
 Graph 2.4.3:   At risk of poverty and social exclusion (AROPE) 
 Source: European Commission 
Some measures were taken to reduce
poverty, but they do seem to be insufficient to tackle the rising share of the
population at-risk-of-poverty. As a result of the
rise in the minimum monthly wage and the restoration of unemployment benefits
to pre-crisis level, income for low income earners has increased slightly. The
Action Plan for Enhancing Social Inclusion in 2014-20 was a first positive
step, but it does not identify the main target groups or fix a budget. It is
therefore unclear how the targets will be achieved. Reforms have to a large
extent focused on fighting abuse, rather than improving coverage and adequacy.
A progressive reduction of social benefits for long-term beneficiaries (i.e.
for more than 12 months) of working age has been introduced. More
responsibility and autonomy has been given to municipalities in the provision
of cash social assistance. The reform resulted in a significant fall in social
benefits expenditure and in the number of recipients (by 25% in the first
quarter 2014 compared to the year before). The main drivers of this fall need
to be clarified. It could be due to a better targeting of beneficiaries, or to
the improved economic situation of those most in need. This fall could however
also be due to a more restricted access to social assistance, given that, from
2015, municipalities can reinvest the savings into other municipal programmes
(mainly into programmes in the social field). They will also have the
responsibility to provide compensation for heating costs, drinking water costs
and hot water cost, for poor residents as an independent municipal function. 
Benefits and activation
Unemployment benefits represent one of
the aspects of the security part of labour regulation. Overall, the coverage
and adequacy of unemployment benefits in Lithuania remains among the lowest in
the EU. ([26]) Lithuania allocates approximately 0.4% of GDP to the funding of
unemployment benefits. The unemployment benefits are paid to approximately 20%
of total unemployed people which are registered with the public employment
service. The relative coverage is showing an increasing trend supported by the
decline in registered unemployed. The temporary ceiling on unemployment benefit
was lifted (January 2015) resulting in a better reflection of benefits with
respect to contributions paid. Nevertheless, this improvement of maximum
unemployment benefit from EUR 188 to EUR 302 will have limited impact on
adequacy as it affects mostly the better paid employees. More generally, total
expenditure on social protection in Lithuania is only half the EU average and
falling. 
The activation of social assistance
beneficiaries through employment or efficient active labour market policy
measures is still limited. The obligation to be
registered with the public employment service in order to be eligible for
social assistance may facilitate access to activation measures. However, the
link between activation and the reduction of cash social assistance is still a
challenge ([27]). The
reduction in cash social benefits is not linked to increasing opportunities,
made by the public employment service, to take part in effective ALMP measures,
training or employment. About a third of all registered social beneficiaries
are involved in 'socially useful activities' carried out by municipalities.
However, there is no evidence that this leads to any improvement in their
employability. In addition, recipients are not adequately insured while
carrying out such work.
Against the projections of a declining
working age population and rising old-age dependency ratio Lithuania faces the
challenge to find a better balance between a sustainable mobility of work force
and emigration, and to bring the full labour force potential to the labour
market.
Lithuania is scoring very well on its
Europe 2020 education targets ([28]), however the challenge to ensure sufficient skills supply in the
future in the context of shrinking working age population remains. 
Schools have an above-average rate of
low achievers in basic skills ([29]). The most important factors
contributing to low school outcomes are the quality of teaching and the limited
use of new innovative teaching methods and information and communication
technologies (ICT). The latter is partially due to high average age of
teachers. Moreover, there is likely to be a shortage of teachers in the next
10-15 years ([30]). This is
because young people are not being attracted to the teaching profession due to
its perceived low prestige and limited career opportunities. The participation
rate in early childhood education and care (ECEC) - usually an effective tool
for preventing low school outcomes – is well below the EU average ([31]). The quality of provision remains a challenge as well ([32]).
Ensuring the labour market relevance of
education and training is crucial, in view of future skills supply. Employers in Lithuania report problems of skills shortages ([33]),.There are notably challenges related to quality and
attractiveness of vocational education and training, as only 28.4% of all
pupils in secondary education follow vocational courses. The number and quality
of apprenticeships and work based learning is still insufficient. A
skills/qualifications monitoring and forecasting system has not yet been
developed.. Adult participation in lifelong learning is one of the lowest in
the EU ([34]), due to
insufficient financing. Moreover, there is a lack of appropriate guidance and
incentives ([35]). 
The government has launched and adopted
several plans, but these have not yet been implemented. The government plans to offer targeted assistance to primary and
secondary schools, and to encourage the development of multifunctional
education centres. These centres would bring together schools and early
childhood education facilities. A national system for evaluating students’
learning outcomes at different age levels has almost been completed. Lithuania
has put in place an action plan and a number of ongoing projects seek to
improve access to early childhood education and to secure its financing until
2016. Specific actions are planned to improve the quality of vocational
education and training, to promote quality apprenticeships and work based
learning.([36]) and to
improve skills governance([37]). These
measures, however, still need to be fully implemented. Finally, the law on
non-formal education and lifelong learning was amended establishing principles
for the recognition of non-formal learning and self-learning, and clarifying
the objectives of adult learning. 
Lithuania has a relatively straightforward
and manageable business environment that is conducive to starting, running and
expanding a business. However, its innovation environment could benefit from
better funding, an adequate legal framework and a focused strategy in order to
attract investment that is beneficiary to long-term growth.
Business environment and administrative
capacity
Lithuania made progress towards
improving its business environment in 2014, but surveys indicate that the
efficiency and transparency of the public administration could become a
concern. Lithuania is ranked 24th (10th in the EU)
in the latest World Bank Doing Business Report ([38]), and has maintained or advanced its position in several
sub-categories. However, on the public administration efficiency front,
Lithuania’s performance has been considerably weaker. 
In 2014, Lithuania adopted several measures
to reduce the administrative burden for businesses. These efforts are reflected
in Lithuania’s improved rankings in several Doing Business ranking
subcategories, in particular ’Starting a Business’ and ’Dealing with
Construction Permits’. On the other hand, insolvency process in Lithuania is
slow and inefficient and getting electricity is expensive. These remain areas
of concern as Lithuania ranks well below the top performers in these
subcategories. In view of the above, the government has adopted a special
protocol providing for improvements in areas such as construction permits, getting
electricity, paying taxes, trading across borders, protecting minority
investors and resolving insolvency. These measures are expected to be
implemented by the end of 2015. A draft law under preparation will adjust the
definition of SME so that a greater number of firms can receive aid from the
EU’s structural funds. 
Although some progress was made in 2014
the efficiency of the public administration is still compromised by weak
institutions and a lack of transparency. While the
government has had moderate success in improving the effectiveness of public
governance and setting up anti-corruption institutions in recent years ([39]), the Lithuanian public remains sceptical about its achievements in
fighting corruption ([40]). Public
procurement and the healthcare sector as areas of particular concern. While the
introduction of e-procurement practice in 2014 marks a notable progress;
nonetheless, prevention policies within local contracting authorities remain
inadequate ([41]). A reform
proposed in November 2014 aims to tighten requirements for public procurement
bidders, but the impact of the reform has yet to be seen. Public procurement in
healthcare sector is particularly vulnerable to corruption. The government’s
plan to increase the transparency within the decision-making process as regards
reimbursements for medicines would be a step in the right direction. Informal
payments to doctors also continue to pose a challenge. Thus,
although Lithuania has put in place a thorough legal framework to fight
corruption, the challenge is to apply its provisions in practice, in particular
by ensuring that anti-corruption
institutions have the capacity to operate effectively.
State-owned enterprises
The Lithuanian authorities have been
undertaking a far-reaching reform of state-owned enterprises since 2010. The reform encompasses 140 entities with a combined asset value of
around 25 % of GDP. It aims to increase the quality and efficiency of
governance and it involves both legislative and organisational changes and the
introduction of performance targets.
In 2014, Lithuania completed the separation
of the commercial and non-commercial functions by implementing their disclosure
in annual reports and advanced the professionalization of boards. Concerning
implementation, the only outstanding issue remains the appointment of
independent board members in the remaining economically relevant SOEs as
required by the national law on State and Municipal Enterprises by the end of
September 2015. Once this is done, the reform of state-owned enterprises may be
considered fully implemented. Going forward ensuring compliance with the reform
as well as monitoring its effectiveness remain important to ensure a lasting
effect. 
Research and Innovation
The Lithuanian economy has potential to
boost its productivity through higher investment in research and development
(R&D), which will support future competitiveness. Lithuania’s labour productivity stands at around 75% of the EU
average. To tap its full potential, the challenge is to move up the large
manufacturing sector the technology ladder ([42]), and to make it more competitive in the medium-to-high technology
sectors. This requires higher investment in R&D.
Currently, Lithuania’s research and innovation (R&I) system is rather
underdeveloped. It has a low level of private R&I investment (Graph 2.6.1), and does not provide sufficient
incentives for business R&I and public-private cooperations.
 Graph 2.6.1:   Business expenditure on R&D (BERD) as % of GDP 
 (1) The 2013 and 2020 forecasts assume that the rate of change will remain the same as in 2007-13. Source: European Commission 
The impact of the Lithuania’s policies
on the cooperation between science and businesses is well below the average ([43]). This seems to be due to the lack of a
proper legal base for the successful commercial exploitation of research
outcomes and the insufficiently competitive science base ([44]). Bureaucratic complexities at the institutional level make it
difficult for R&D teams in universities to take part in industrial projects
([45]).
Business-science cooperation is often formal, focused on meeting eligibility
criteria for public funding programmes rather than structural and long-lasting.
In 2014, the government adopted new guidelines for the procurement of
innovative products by public administrations. The impact of these new measures
has yet to be seen. 
In addition, Lithuania seems to be using EU
funding to replace rather than complement R&I funding from national
sources. As a consequence, the country’s science base and the potential to use
its scientific developments to leverage economic activity are relatively weak. 
Despite a large number of strategic
policy documents, different measures and public programmes, a coherent strategy
on how to ensure knowledge transfer is missing.
Instead, scattered strategies and programmes focus on separate elements,
leading to fragmentation ([46]) and a lack of success. In addition, there is a lack a focus on
human resources training. Policy appears to be skewed towards infrastructure
investment to the detriment of intangible R&I capacity-building measures.
Improving the country’s innovation output will require not just developing a
business environment conducive to investment but also improving the skills base
in higher education and offering the right incentives to researchers in the
public sector in order to involve them in knowledge transfer and the commercial
exploitation of research.
Adequate infrastructure is the backbone of
modern economies. Effective systems for sustainable energy, information and
communication technologies (ICT) and resource optimization lay the foundation
for boosting economic growth, social uplift and ecological sustainability in
the short-to-medium term.
Energy infrastructure
Lithuania remains vulnerable in terms of
energy supply security, and there is a lack of competition in some parts of the
domestic energy sector. Following the closure of
Lithuania’s last nuclear power plant in 2009 the country imports almost three
quarters of its total energy needs. The domestic electricity market has
been fully deregulated, but customers have, so far, been reluctant to switch suppliers.
As a result, the gas retail market remains highly concentrated with the two
leading suppliers capturing 98% of the market. Diversifying energy sources,
promoting the interconnectivity of electricity and gas networks with European
partners, and strengthening competition in the energy sector were also part of
a Council recommendation in 2014.
Lithuania has made some progress in
improving Lithuania’s energy infrastructure network. If Lithuania continues to
work on this, it will strengthen its energy supply security further. In November 2014, a liquefied natural gas (LNG) terminal in the Port of Klaipeda became
operational with an annual total capacity of 4 billion cubic meters of natural
gas ([47]). In
addition, two electricity interconnectors (’Nordbalt’
with Sweden, and ’LitPolLink’ with Poland) are expected to be commissioned in
2015. Both projects are of
vital importance in linking the Baltic electricity grid with continental
Europe. Two important gas interconnectors linking Lithuania with Poland and
Latvia are scheduled to be commissioned in 2019 and 2020, respectively. The
acceleration of these projects would allow Lithuania to
achieve its energy supply security earlier and could result in additional
suppliers entering the Lithuanian market. In 2014, the Commission decided to
co-finance four energy infrastructure projects of direct importance to
Lithuania with grants of approximately EUR 334 million under the Connecting
Europe Facility programme.
Energy efficiency
Further improving Lithuania’s energy
efficiency reduces long-term energy costs, and strengthens energy security. With an energy intensity more than twice the EU average, Lithuania
is one of the eight most energy-intensive economies in the EU ([48]). Energy intensity is particularly high in residential housing and
industry. Final energy consumption in Lithuania rose constantly between 2005
and 2013, and the trend has not been reversed since then ([49]). As a result, Lithuania is not currently on track to meet its
national energy efficiency target.
In 2014, Lithuania stepped up measures
to improve the energy efficiency of buildings in
line with a Council recommendation. After legislative changes and the
introduction of a new financing scheme in 2013, the modernisation of
multi-apartment buildings accelerated in 2014, albeit from a low level ([50]). Nevertheless, the challenge of improved energy efficiency in
buildings still remains, given that 96% of multifamily buildings in Lithuania
(more than 34 000 houses) were built before 1993 and most of them still have a
very poor level of energy efficiency. In this context, there is further scope
for energy efficiency improvements by fully implementing the existing
provisions of EU law. This involves, in particular, introducing individual
metering and billing, which may empower citizens, including those living in
multifamily buildings, to take more control over their energy consumption and
bills.
No measures were taken to reduce the
energy intensity of the transport sector and there is scope to increase the
proportion of energy from renewable sources, which is below 5%. The public transport system remains underdeveloped and excise
duties on motor fuel are close to the minimum level set by the EU Energy
Taxation Directive. 
Transport and information and communication
The transport infrastructure in
Lithuania remains underdeveloped.  On the other hand, the ICT network is in
good shape. Only 7 % of rail tracks are
electrified, and the country lacks a north-south rail connection. Moreover,
obstacles to the efficient functioning of the internal rail market persist, and
competition in the rail sector is limited, even though the railways have in
theory been opened up to competition. There is further scope to enhance road
safety as the number of road fatalities remains one of the highest in the EU.
Lithuania’s coverage of household
broadband connections is large and high speed connectivity widely available ([51]). While the population has a high level
of ICT skills overall ([52]), its
take-up (in terms of internet subscriptions) seems to be somewhat limited as
only 65.4% of households have a subscription (EU average 78.3%) and 25% of the
population having never used the internet. Promoting and strengthening the
digital economy seems to represent a fruitful avenue for further economic
growth. It could also further improve the quality of services provided,
increase competition, create more consumer choice and open up new sources of
employment growth ([53]).
Overall connectivity in Lithuania’s
transport infrastructure may be boosted by speeding up the planning and
implementation of the Rail Baltic European-gauge railway infrastructure
project. This is a high priority pre-identified
project under the Connecting Europe Facility and would finally connect the
Baltic States to a trans-European network. In 2014 a joint venture was created
and tasked with preparing and implementing the project. If completed on
schedule by mid-2020, the project would provide a strong stimulus for economic
growth and for reducing greenhouse gas emissions through a modal shift towards
rail in freight and passenger transport. 
Environment
Lithuania has scope to improve
incentives to encourage public and private actors to use natural resources
responsibly. Lithuania is behind on its Europe 2020
commitments on several environmental indicators, such as greenhouse gas
emissions in non-emissions trading scheme sectors, preventing and reducing the
generation of waste, and increasing re-use and recycling ([54]).
A first step has been taken to improve
waste management, while more investment is needed to achieve the recycling
target of 50% by 2020 ([55]). In November 2014, the way was cleared to introduce a landfill tax
in 2016, which could encourage resource efficiency in waste management and
divert waste from landfill ([56]). However,
there is further scope to improve waste management practises, particularly by
developing separate collection, sorting, recycling and composting.
 Commitments || Summary assessment([57]) 
 2014 Country specific recommendations (CSRs) 
 CSR 1: Reinforce the budgetary measures for 2014 in the light of expenditure growth exceeding the benchmark and the emerging gap of 0.3% of GDP in terms of structural effort based on the Commission services 2014 spring forecast, pointing to a risk of significant deviation relative to the preventive arm of the Stability and Growth Pact requirements. In 2015, strengthen the budgetary strategy to ensure the required adjustment of 0.5% of GDP towards the medium‐term objective. Thereafter ensure that the medium‐term objective is adhered to. Complement the budgetary strategy with a further strengthened fiscal framework, in particular by ensuring binding expenditure ceilings when setting the medium‐term budgetary framework. Further review the tax system and consider increasing those taxes that are least detrimental to growth, such as recurrent property and environmental taxation, while continuing to improve tax compliance. || Lithuania has made some progress in addressing CSR 1 of the Council recommendation (this overall assessment of CSR1 excludes an assessment of compliance with the Stability and Growth Pact): ·       Some progress in strengthening the fiscal framework was made in 2014 as Lithuania transposed the Fiscal Compact into national law. However, the structurally balanced budget rule does not appear clearly centred on compliance with the medium-term objective and its adjustment path. In this respect, it is not unequivocally anchored to the EU fiscal framework. The credibility of the new fiscal framework is also weakened by loosely defined escape clauses, in particular in the event of a negative output gap. ·       Limited progress in reviewing the tax system and improving tax compliance. Minor amendments have been made to property tax and landfill tax on waste has been introduced. A tax compliance strategy has been adopted. 
 CSR 2: Adopt and implement legislation on a comprehensive pension system reform. In particular, align the statutory retirement age with life expectancy, restrict access to early retirement, establish clear rules for the indexation of pensions, and promote the use of complementary savings schemes. Underpin pension reform with measures that promote the employability of older workers. || Lithuania has made limited progress in addressing CSR 2: ·       Limited progress in implementing a comprehensive pension system. The statutory retirement age is being increased gradually until 2026. However, at present the pension system does not have a model that takes into account the life-expectancy indicator and there are no clear rules for indexation of pensions. The government intends to address comprehensive pension reform as part of a wider social model approach but this remains to be consolidated and is not yet adopted. ·       Some progress in promoting the employability of older workers. Lithuania introduced financial support measures, but a comprehensive active ageing strategy is still missing. ·       Lithuanian pension scheme contains penalties for early retirement, and the share of people choosing early retirement is very low. 
 CSR3: Better target active labour market policy measures to the low-skilled and long-term unemployed. Improve coverage and adequacy of unemployment benefits and link them to activation. Address persistent skills mismatches by improving the labour-market relevance of education inter alia based on skills forecast systems and promote life-long learning. In order to increase the employability of young people, prioritise offering quality apprenticeships, other forms of work‐based learning, and strengthen partnership with the private sector. Review the appropriateness of labour legislation, in particular with regard to the framework for labour contracts and for working‐time arrangements, in consultation with social partners. || Lithuania has made limited progress in addressing CSR3: ·       Limited progress on targeting of active labour market policy measures: the coverage is still low, still too much emphasis on ALMP measures that are less effective to provide sustainable employment ·       Limited progress on coverage and adequacy of unemployment benefits and link to activation. ·       Some progress has been made on labour market relevance of education as several policy decisions were taken, directed at improved VET governance and strengthened cooperation with the private sector notably to offer more work based learning. ·       Some progress on addressing employability of young people. Delivery of Youth Guarantee started, with improved partnerships but too early to assess effectiveness. Still need to provide more apprenticeships and increase their quality. ·       Limited progress on labour legislation. A number of legal acts has been amended but with limited effects.. Government intends to address labour regulation as part of a wider social model but this remains to be consolidated and is not yet adopted. However the objective to combine in a single package the measures ensuring more flexibility to labour relations but also more security seems to go in the right direction. 
 CSR 4: Ensure adequate coverage of those most in need and continue to strengthen the links between cash social assistance and activation measures. || Lithuania has made no progress in addressing CSR 4: ·       The measures taken seem insufficient to tackle the increase of "at risk of poverty" share of the population. The progressive reduction of social benefits to long term beneficiaries could reduce the coverage of those most in need if they cannot find a job. The reform of cash social assistance - and the improved economic situation - resulted in a strong decrease of the expenditure and of the number of recipients. However the situation of those leaving the scheme is unclear.  ·       The reduction of the cash social benefits has no direct link to the offer of effective ALPM measures, employment or training. The activation of social assistance beneficiaries is limited. About one third of all registered social beneficiaries are involved in "socially useful activities" of municipalities (max 40 hours / month) but there is no evidence that it leads to any improvement of the employability of the beneficiaries. In addition the recipient is not assured during the activity. 
 CSR 5: Complete the implementation of the reform of state-owned enterprises as planned; in particular by finalising the separation of commercial and non-commercial activities, further professionalising executive boards and closely monitoring compliance with the requirements of the reform. || Lithuania has made substantial progress in addressing CSR 5: ·       The government completed the separation of commercial and non-commercial activities, which are now disclosed in annual reports. ·       It has passed the law which identified the remaining economically relevant SOEs, which have to appoint independent board members by the end September 2015. ·       It can therefore be expected that the CSR might be fully implemented by that time. 
 CSR 6: Step up measures to improve the energy efficiency of buildings, through a rapid implementation of the holding fund. Continue the development of cross-border connections to neighbouring Member States for both electricity and gas to diversify energy sources and promote competition through improved integration of the Baltic energy markets. || Lithuania has made some progress in addressing CSR 6: ·       Some progress in improving the energy efficiency of buildings. After changing the funding model for housing renovation, applications as well as renovations picked-up in 2014, albeit from a low-level. ·       Some progress on diversifying energy sources. The Klaipeda LNG terminal was finalised and became operational in December 2014, while work on cross-border interconnectors continued as scheduled. 
   Europe 2020 (national targets and progress) 
 Employment rate target: 72.8% || In 2014, the employment rate was 69.9 %, and hence slightly above EU average (average of first three quarters). The employment rate stood at 68.5 % (2013), close to the EU average (68.4 %). 
 R&D target: 1.9% || In 2013, limited progress was observed in meeting the R&D intensity target. R&D intensity reached 0.9 % of GDP, of which 0.24 % came from business investment. 
 Greenhouse gas (GHG) emissions target: +15% compared to 2005 emissions, ETS (Emissions Trading System) emissions are not covered by this national target || Progress is limited since the target still might be missed. According to the latest national projections submitted to the Commission, and when existing measures are taken into account, the target is expected to be missed by a margin of 2 pp: +17 % in 2020 compared to 2005. Greenhouse gas emissions from sectors not covered by the Emissions Trading Scheme fell by -4 pp between 2005 and 2013. 
 Renewable energy target: 23 % Share of renewable energy in transport sector: 10 % || The proportion of energy produced from renewable sources in Lithuania reached 23.1% in 2013, (provisional 2013 data Eur'Observ'ER) and Lithuania has already reached its 2020 RES target. Measures should be taken to advance towards the binding 10% RES target in transport. In 2012, renewable energy contributed 4.8 % of total energy consumed.. 
 Energy efficiency: 17% reduction in final energy use compared to 2009 level (reduction of 740 ktoe) This implies reaching a 2020 level of 6.49 Mtoe of primary and 4.28 Mtoe of final energy consumption. || Lithuania notified the Commission of the policy measures it plans to adopt to implement Article 7 of the Energy Efficiency Directive (2012/27/EU). Greater energy savings and energy efficiency improvements would follow if the energy efficiency Directive 2012/27 was fully transposed at national level, which is not the case despite the June 2014 deadline.  
 Early school leaving target: <9% || EU and national targets have already been met. The early school leaving rate was 7.4 % in 2011, 6.5 % in 2012, and 6.3 % in 2013, below the national target of 9 % and the EU average (12.7 % in 2012). Some progress has been made over the past year. Significant disparities between girls and boys and rural and urban areas remain. 
 Tertiary education target: 48.7% || EU and national targets have already been met. The rate of tertiary education attainment was 45.7 % in 2011, 48.7 % in 2012, and 51.3 % in 2013, above the EU average (35.7 % in 2012). 
 Risk of poverty or social exclusion target: 814000 || In 2013, there were 917,000 people at risk of poverty or social exclusion (30.8 % of the total population). In 2012, the same number stood at 975,000 (32,5%). The number of people at risk of poverty or social exclusion is still above the pre-crisis level (28.7 %). In 2010, when the national target was set, and at that time 1,109,000 people (33.4 %) were at risk of poverty or social exclusion. 
 Table AB.1:     Macroeconomic indicators 
   Notes:                                                                                                                                                                                                          1 The output gap constitutes the gap between the actual and potential gross domestic product at 2010 market prices 2 The indicator of domestic demand includes stocks.                                                                                                                                                  3 Unemployed persons are all those who were not employed, had actively sought work and were ready to begin working immediately or within two weeks. The labour force is the total number of people employed and unemployed. The unemployment rate covers the age group 15-74.                                                                                                           
 Source: European Commission 2015 winter forecast; Commission calculations. 
 Table AB.2:     Financial market indicators 
 Notes:                                                                                                                                    1) Latest data November 2014.                                                                                                                             2) Latest data Q2 2014.                                                                                                                                              3) Data on non-impaired loans overdue more than 60 days plus impaired loans. 4) After extraordinary items and taxes. Compiled according to the FSI compilation guide and therefore may differ from the national definition. 5) Latest data September 2014.                                                                                                                            6) Latest data June 2014.  Monetary authorities, monetary and financial institutions are not included. * Measured in basis points.                                                                                           
 Source: IMF (financial soundness indicators), Commission (long-term interest rates), World Bank (gross external debt) and ECB (all other indicators). 
 Table AB.3:     Taxation indicators 
 Notes:                                                                                                                                  1. Tax revenues are broken down by economic function, i.e. according to whether taxes are raised on consumption, labour or capital. See European Commission (2014), Taxation trends in the European Union, for a more detailed explanation.  2. This category comprises taxes on energy, transport and pollution and resources included in taxes on consumption and capital.                                                                                                                                3. VAT efficiency is measured via the VAT revenue ratio. It is defined as the ratio between the actual VAT revenue collected and the revenue that would be raised if VAT was applied at the standard rate to all final (domestic) consumption expenditures, which is an imperfect measure of the theoretical pure VAT base. A low ratio can indicate a reduction of the tax base due to large exemptions or the application of reduced rates to a wide range of goods and services (‘policy gap’) or a failure to collect all tax due to e.g. fraud (‘collection gap’). It should be noted that the relative scale of cross-border shopping (including trade in financial services) compared to domestic consumption also influences the value of the ratio, notably for smaller economies. For a more detailed discussion, see European Commission (2012), Tax Reforms in EU Member States, and OECD (2014), Consumption tax trends.                                                                                                                                 Source: European Commission                                                                                                                            
 Table AB.4:     Labour market and social indicators 
 (1) Unemployed persons are all those who were not employed, but had actively sought work and were ready to begin working immediately or within two weeks. The labour force is the total number of people employed and unemployed. (2)  Long-term unemployed are persons who have been unemployed for at least 12 months.  Data on the unemployment rate of 2014 includes the last release by Eurostat in early February 2015.  Source: European Commission (EU Labour Force Survey and European National Accounts). 
 Table AB.5:                Expenditure on social protection benefits (% of GDP) 
 (1)  People at risk of poverty or social exclusion (AROPE): individuals who are at risk of poverty (AROP) and/or suffering from severe material deprivation (SMD) and/or living in households with zero or very low work intensity (LWI). (2)  At-risk-of-poverty rate (AROP): proportion of people with an equivalised disposable income below 60 % of the national equivalised median income. (3) Proportion of people who experience at least four of the following forms of deprivation: not being able to afford to i) pay their rent or utility bills, ii) keep their home adequately warm, iii) face unexpected expenses, iv) eat meat, fish or a protein equivalent every second day, v) enjoy a week of holiday away from home once a year, vi) have a car, vii) have a washing machine, viii) have a colour TV, or ix) have a telephone. (4) People living in households with very low work intensity: proportion of people aged 0-59 living in households where the adults (excluding dependent children) worked less than 20 % of their total work-time potential in the previous 12 months. (5) For EE, CY, MT, SI and SK, thresholds in nominal values in euros; harmonised index of consumer prices (HICP) = 100 in 2006 (2007 survey refers to 2006 incomes). (6) 2014 data refer to the average of the first three quarters. Source: For expenditure for social protection benefits ESSPROS; for social inclusion EU-SILC. 
 Table AB.6:     Product market performance and policy indicators 
 Source: European Commission; World Bank — Doing Business (for enforcing contracts and time to start a business); OECD (for the product market regulation indicators). 
 Table AB.7:     Green growth 
 Country-specific notes: 2013 is not included in the table due to lack of data. General explanation of the table items: All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2000 prices)           Energy intensity: gross inland energy consumption (in kgoe) divided by GDP (in EUR)           Carbon intensity: Greenhouse gas emissions (in kg CO2 equivalents) divided by GDP (in EUR)           Resource intensity: Domestic material consumption (in kg) divided by GDP (in EUR)           Waste intensity: waste (in kg) divided by GDP (in EUR) Energy balance of trade: the balance of energy exports and imports, expressed as % of GDP  Energy weight in HICP: the proportion of "energy" items in the consumption basket used for the construction of the HICP Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual % change) Environmental taxes over labour or total taxes: from DG TAXUD’s database ‘Taxation trends in the European Union’ Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2005 EUR) Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP Electricity and gas prices for medium-sized industrial users: consumption band 500–2000MWh and 10000–100000 GJ; figures excl. VAT. Recycling rate of municipal waste: ratio of recycled municipal waste to total municipal waste Public R&D for energy or for the environment: government spending on R&D (GBAORD) for these categories as % of GDP Proportion of GHG emissions covered by ETS: based on greenhouse gas emissions (excl LULUCF) as reported by Member States to the European Environment Agency Transport energy intensity: final energy consumption of transport activity (kgoe) divided by transport industry gross value added (in 2005 EUR) Transport carbon intensity: greenhouse gas emissions in transport activity divided by gross value added of the transport sector Energy import dependency: net energy imports divided by gross inland energy consumption incl. consumption of international bunker fuels Diversification of oil import sources: Herfindahl index (HHI), calculated as the sum of the squared market shares of countries of origin Diversification of the energy mix: Herfindahl index over natural gas, total petrol products, nuclear heat, renewable energies and solid fuels Renewable energy share of energy mix: %-share of gross inland energy consumption, expressed in tonne oil equivalents * European Commission and European Environment Agency ** For 2007 average of S1 & S2 for DE, HR, LU, NL, FI, SE & UK. Other countries only have S2. *** For 2007 average of S1 & S2 for HR, IT, NL, FI, SE & UK. Other countries only have S2. 
 Source:  European Commission unless indicated otherwise; European Commission calculations . 
([1])  See Hogg et al., 2014, Study on Environmental Fiscal Reform
Potential in 12 EU Member States.
([2])  In 2013, 37.8% for a single person
earning 50% of the average wage (EU-28 average 34.0%) (Source: Eurostat). In
2014, the tax burden on low-income earners was reduced by around one percentage
point through an increase in the PIT allowance; but it remains above the EU-28
average.
([3])  2012 Update Report to the Study to
quantify and analyse the VAT Gap in the EU-27 Member States, TAXUD/2013/DE/321.
([4])  See also the recent European Commission
report on VAT collection and control procedures, COM(2014) 69 final. Moreover,
Lithuania is currently developing models to estimate the VAT gap.
([5])  Statistics
Lithuania reports that 728700 people emigrated from Lithuania between 1990 and
2011. Young people (aged 20 to 34) account for more
than 50% of that figure. (Source:
OECD, 2013, Coping with Emigration in Baltic and East European Countries,
OECD Publishing).
([6])  Source: The 2012 Ageing Report and Eurostat.

([7])  In 2013, the at-risk-of-poverty
threshold for a single person was EUR 234 per month and the average old-age
social insurance pension was EUR 246 per month. The at-risk-of-poverty rate is
considerably higher for older women (aged 65 years and over) (23.9%) than for
men (10.9%), (2013).
([8])  European Social Partnership Network
(ESPN) PAR-2015 Pensions Country Profile.
([9])  Lithuania ranked above average in the
latest Commission SME access to finance (SMAF) index. The index includes
sub-indices on access to debt and equity. In the latest ECB/Commission SME
access to finance survey (April-September 2014) access to finance was ranked as
the second most pressing problem facing Lithuanian companies.
([10]) As a consequence of this, the
loan-to-deposit ratio fell from nearly 200% in 2008 to 115% in 2014. The local
liquidity ratio of 41% (30% is the minimum requirement) confirms that there is
a good level of liquidity in the banking sector.
([11]) For instance consumption of alcoholic
beverages and tobacco products per person 15+ increased between 2010-2013.
Lithuanian Health Information Centre http://sic.hi.lt/data/la2013.pdf
([12]) 52% of young unemployed registered in July 2014 had no
qualifications, 42% had no work experience (source: National Public Employment
Service data)
([13]) According to the Public Employment Service estimations, in
January-November 2014, 57.5% of registered young unemployed under 29 year old
received an offer under the YG within 4 months from the day of their registration with Public Employment
Service.
([14]) Youth job centres are planned to be available in all
municipalities by 2016 and a system to identify NEETs not registered in Public
Employment Service is planned for 2015-2018.
([15]) Coverage of ALMPs in the three quarters of 2014 increased to
27.2%, still below the national target for 2014 (30.5%) (Source: National data,
ESF annual examination meeting)
([16]) The adopted Law on Support of Employment
includes a new safeguard for vocational training actions. The obligation to
keep trained people in job position afterwards was reduced from twelve to six
months in the case of people originating from more vulnerable groups.
([17]) Between 2010 and
2013 only some 8-9% of total dismissed women and 5-6% of total dismissed men
received redundancy payments. 
([18]) A recent employer survey showed a share
of 17% (albeit declining trend) for undeclared payments ("envelope
wages") in Lithuania. See http://www.sseriga.edu/en/centres/csb/shadow-economy-index-for-baltics/.
In another survey, the share of respondents in Lithuania who reported to have
performed undeclared work was the fifth highest in the EU. Special
Eurobarometer 402: UdW in the European Union, 2013.
([19]) http://www.worker-participation.eu/National-Industrial-Relations/Countries/Lithuania/Collective-Bargaining
([20]) Simplification of the conditions for the employment of highly
qualified third country workers in understaffed professions in Lithuania
([21]) The support for skills acquisition by concluding bilateral
agreements and introduction of voluntary internship agreements
([22]) The Gini coefficient increased compared to 2012 and is the 3rd
highest in the EU in 2013. The Gini index measures the extent to which the
distribution of income or consumption expenditure among individuals or
households within an economy deviates from a perfectly equal distribution.
([23]) Cingano, F. (2014), "Trends in Income Inequality and its
Impact on Economic Growth", OECD Social, Employment and Migration Working
Papers, No. 163, OECD Publishing. DOI: 10.1787/5jxrjncwxv6j-en
([24]) For children (from 20.8% in 2012 to 26.9% in 2013), for unemployed
persons (from 54.4% in 2012 to 61% in 2013), for elderly people (from 18.7% in 2012 to 19.4% in 2013), in work poverty (from
7.7% in 2012 to 9.2% in 2013).
([25]) This is high notably for persons
with severe disabilities in the age group 16-64 (65.9%); it is the second
highest in EU and increased from 2011 (62.3%), EU SILC 2012.
([26]) Esser I., Ferrarini T., Nelson K., Palme J., Sjöberg O. (2013)
Unemployment Benefits in EU Member States. Employment, Social Affairs &
Inclusion, European Commission. July 2013.
([27]) The municipalities have the right, but
not the obligation, to keep the previous level of cash social benefits even if
the beneficiary was not offered any ALMP measure or employment.
([28]) Regarding Tertiary education attainment
rate and early school leaving rate
([29]) According to the OECD's PISA 2012
survey, the proportion of low-achieving 15-year-olds in Lithuania is 21.2% in
reading (EU average: 17.8%) and 26.0% in mathematics (EU average: 22.1%).
([30]) Development of Education in Lithuania
2013.
([31]) For children between four years of age
and the start of compulsory schooling the figures stands at 84.8% (EU average:
93.9% in 2012). The participation rate of children from disadvantaged families
is 23.6 percentage point lower. In Lithuania 15-year-old students who have attended
ECEC for more than one year tend to achieve better results than those who
attended ECEC for a year or less (PISA 2012).
([32]) Lithuanian Education Employees Trade
Union indicates three main problematic areas in ECEC: staff, shortage of funding
and lack of social dialogue http://www.lsdps.lt/index.php?option=com_content&view=article&id=1827:i-peciukonien-privalome-pagaliau-ilsti-i-elio&catid=75:padaliniu-veikla&Itemid=162

([33]) In 2013, about
40% of the members of the Lithuanian Confederation of Industrialists stated
that they were facing a shortage of suitable skills were unable to employ more
workers to fill vacant jobs. Some of these problems may
however relate to unattractive working conditions and lack of appropriate human
resources policies
([34]) 5.6% in 2013 compared to the EU average
of 10.5%
([35]) There is a lack of sustainable financing mechanisms and career
guidance for adults, curricula are inflexible and not adapted to adult needs,
and there is no  system to assess and recognise skills acquired through
non-formal or informal learning.
([36]) The approved vocational education and training
development action plan (2014-16) includes measures to fund apprenticeship
initiatives and work-based learning, improve qualifications of in-company
trainers, support apprentices’ mobility, invest into modernising practical
training facilities and update vocational education and training curricula.
Lithuania will also take part in the country review by the European Centre for
the Development of Vocation Training (CEDEFOP). This will result in a roadmap
for apprenticeship measures in 2015.
([37]) A "professional qualifications
map" which is to provide Education institutions with information on
graduates’ employability is being tested but has not yet completed.
([38]) The World Bank’s Doing Business project, launched in 2002, looks at domestic small and medium-sized
companies and measures the regulations applying to them through their life
cycle.
([39]) Lithuania ranks 20th among
the EU countries in both ’Government effectiveness’ and ’Control of corruption’
- indices compiled by the World Bank. This places Lithuania below average in
the EU; yet considerably better than EU’s worst performers.
([40]) In a 2013 Eurobarometer survey 29% of
Lithuanians acknowledged they had been asked for bribes in exchange for public
services, the highest level within the EU.
([41]) 2014 EU Anti-corruption
Report annex on Lithuania
([42]) The manufacturing sector produces 21 % of GDP, as compared with
the EU average of just over 15 % of GDP.
([43]) Despite innovation vouchers, industrial PhDs and consultancy
support for technology transfer, public-private co-operation (e.g. the
public-private co-publications per million population remain low. Lithuania
ranks 24th in the EU, with a total of 10 in 2011 as compared with EU average of
23).
([44]) The average performance of Lithuania as measured by the fraction
of Lithuanian scientific publications within the 10% most cited publications
worldwide was 6.2% in 2009 compared to an EU average of 10.98%. 
([45]) Despite the establishment of the so-called ’Valleys’ (partnerships
integrating higher education, research and businesses around scientific and
technological areas), science and technology parks and open access centres,
cooperation between industry and research organisations remains low and success
stories relating to the transfer of technology and the commercialisation of
public R&D are very rare Moreover, the existing legal framework does not
allow for private businesses to become stakeholders in the newly constructed
“open access” research infrastructures and does not promote the effective use,
management and financing of large research infrastructures.
([46]) E.g. Lithuania’s ’clusters’ approach is
not coordinated with its ’valleys’ approach, as these fall under the
responsibility of different departments
([47]) In 2014 the
Lithuanian company Litgas concluded a five-year contract with Norwegian Statoil
for the yearly delivery of 0.5 billion cubic meters  of liquefied natural gas.
([48]) The Lithuanian energy intensity was
266.6 (kg of oil equivalent per 1000 EUR) in comparison with the EU average of 141.6 in 2013.  Source: Eurostat 2014
([49]) In 2013, final energy consumption in
the residential sector stood at 31% (well above EU average of 27%), while it
amounted to 33% in the transport sector (1% above EU average of 32%). Energy
consumption for the manufacturing industry stood at 21% which is slightly less
than EU average of 25%. 
([50]) The most recent available information
on the JESSICA holding fund, the respective funding instrument used, shows that
the number of approved projects has reached 2728, while
746 multi-apartment buildings have been modernised in 2014.
([51]) 97.1% for fixed broadband coverage of
households (EU average of 97.2%); and with 91% for rural areas slightly above
the EU average. Next-generation access (i.e. a connection capable of providing a
download speed of at least 30 Mbps) is available to 97% of households. As a
result, Lithuania enjoys the 4th most comprehensive coverage in
Europe.
([52]) 34.7% of Lithuanians have obtained ICT
skills through formal education as compared with the average EU figure of 27.5%).
Lithuanians are on average as skilled as the EU average user in terms of
computer skills and better skilled in using the internet (where the percentages
of those with medium and high internet skills are 59.2% as compared with 46.6%
for the EU as a whole). 
([53]) As regards the five main drivers of the
digital economy, Lithuania ranks seventh out of 28 Member States in the use of internet,
8th in connectivity, 9th in the integration of digital technologies
by business, 15th in human capital, and 16th in digital
public services.
([54]) 77% of municipal waste was landfilled
in 2012 (EU average: 33%), while only 18% was recycled (EU average: 27%).
([55]) Moreover, more
targeted investments in incineration or mechanical
biological treatment plants could go hand in hand, and not hinder, Lithuania’s
progress in fulfilling its  recycling targets.
([56]) The Law on
Pollution Tax has been amended foreseeing the introduction of a landfill tax in
2016 with a progressive increase from 21.72 to 44.89 EUR/t until 2020.
([57]) The following categories are used to
assess progress in implementing the 2014 CSRs of the Council Recommendation: No
progress: The Member State (MS) has neither announced nor adopted any measures
to address the CSR. This category also applies if the MS has commissioned a
study group to evaluate possible measures. Limited progress: The MS has
announced some measures to address the CSR, but these measures appear
insufficient and/or their adoption/implementation is at risk. Some progress:
The MS has announced or adopted measures to address the CSR. These measures are
promising, but not all of them have been implemented yet and implementation is
not certain in all cases. Substantial progress: The MS has adopted measures,
most of which have been implemented. These measures go a long way in addressing
the CSR. Fully addressed: The MS has adopted and implemented measures that
address the CSR appropriately.